CGFS releases report on stress testing

The BIS is releasing today a report entitled Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues. The report represents the findings of a working group established by the Committee on the Global Financial System. The group was asked to investigate the current use of stress testing at large financial institutions, as well as to explore the possibility that aggregating financial firms' stress test results might produce information that is of use to central banks, other financial regulators, and private sector practitioners.

Drawing on interviews with risk managers at more than 20 large, internationally active financial institutions, the group concludes that stress testing is likely to remain an important element of the risk management strategies of large financial firms. The first chapter of the report summarises current practices in stress testing and discusses some of its limitations. With regard to the aggregation of stress test results, the group concluded that while, under ideal circumstances, aggregate stress tests could potentially provide useful information in a number of areas, it is as yet unclear whether those circumstances prevail. Some of the considerations which might be involved in setting up an aggregate stress test exercise, and the limitations to the potential usefulness of such an exercise, are examined in Chapter 2 of the report.

The report recommends that a one-off survey of the scenarios currently used by risk managers be conducted. This recommendation is based on the recognition that stress testing has become an important element of the risk management strategies of large financial firms, and that further information about stress testing practices could prove informative regarding the risks faced by the financial system. Such a survey would add to the overall transparency of the risk management process and allow firms to improve information sharing, at a relatively low cost in terms of reporting burden.

The report is available on the BIS website at www.bis.org.

Notes: The Committee on the Global Financial System is a central bank forum established by the Governors of the G10 central banks to monitor and examine broad issues relating to financial markets and systems with a view to elaborating appropriate policy recommendations to support the central banks in the fulfilment of their responsibilities with regard to monetary and financial stability. In carrying out these tasks, the Committee places particular emphasis on assisting the Governors in recognising, analysing and responding to threats to the stability of financial markets and the global financial system.

The working group that prepared the report was chaired by Allen Frankel of the Board of Governors of the US Federal Reserve System. The working group's members are listed in the report.